Friday, September 13, 2013

If you have filed at least one income tax returns, you already know that there are countless sections in our Indian Tax Regulations and there are many that we dont even know about. The Government and the Tax Department have recently made amendments to Section 80TTA that would be greatly beneficial to Individuals across the country, especially those that are used to keeping substantial sums of money in their Savings Accounts at the Bank.

The idea behind this article is to elaborate on these amendments and throw light on the same.

So, What is this Section 80TTA?

Section 80TTA was added recently to the Indian Income Tax Regulations which will kick-in starting this financial year Apr 2013 to Mar 2014. According to Section 80TTA, up to Rs. 10,000/- is exempt from Income Tax if the income is the interest earned from Savings Bank Account. This 10,000 rupees exemption is over and above all other deductions like the 1 lakh exemption under Section 80C and so on.

This exemption is available to both Individuals and HUF's (Hindu Undivided Families) and the interest could be earned on any savings account held with a Bank or a Post Office or even a Society.

Limitations of Section 80 TTA

1. The Interest earned from Fixed Deposits or Recurring Deposits is not included under this Section 80TTA
2. The Interest earned must be from a regular/normal Savings Bank Account
3. The Section is applicable only starting 1st April 2013
4. The Upper Limit on the Exemption is Rs. 10,000. If the Interest earned in a financial year is above Rs. 10,000/- the Remaining amount is fully taxable
5. The Combined Interest earned from all your Savings Accounts must be taken into consideration for this 10,000 rupee limit.

For Ex: If you earn Rs. 6,000/- from your ICICI Account, Rs. 7,000/- from your HDFC Account and Rs. 4,000/- from your SBI Account, you can deduct Rs. 10,000/- from the total interest earned and still pay tax on the remaining amount of Rs. 7,000/-

Is this a good news?

Absolutely, YES. It makes things a lot easier. Most of us do not have hefty bank balances but still a few hundred rupees of interest will be credited into your account by your bank ever year. According to the existing tax regulations (Up until the last financial year) all these interest amounts must be included into your Taxable Income. Most of us did not know about this rule and would make the mistake of not including it. I wrote an article last year in Feb titled "Some Common Tax Filing Mistakes where not including Bank Account Interest was one of the mistakes.

Going forward, not including it would not be a mistake because, since you have an exemption of up to Rs. 10,000/- you will no longer be an Innocent Tax Evader

If I were to fully utilize this 10,000 rupee exemption limit, how much can I Keep in my Savings Account?

The amount actually depends on which bank you have an account with and how much interest they offer you. Most banks offer interest at the mandatory minimum of 4% in which case you can keep up to Rs. 2.5 lakhs. Some private Banks like Kotak or YES Bank offer much higher interest rates. So, assuming your interest rate is 5% you can keep up to 2 lakhs and if your interest is 6% you can keep up to 1.66 lakhs.

Comparison Between FD's and Savings Account Interest Income:

Lets say you have 1 lakh in a FD that earns 9% Interest per annum, you will get 9,000 as interest and if you fall into the 30% tax slab, your effective Interest income is only 6000 which works out to only 6%. Alternately if you put this money in a savings account that actually offers you 6% you will still get the same 6,000 rupees as Interest Income and pay no tax on the same because the amount is still under the 10,000 rupee exemption limit under Section 80TTA.

Impact of this Rule:

Remember the article titled Awesome News for Savings Account Holders that was written in 2011 wherein we talked about a ruling from RBI that allowed banks to set their own Interest Rates for Savings Account with a minimum of 4%? So, this new ruling will add extra motivation for individuals to keep money in their savings account which would give banks additional motivation to hike interest rates on savings accounts to woo new customers.

Some Final Words:

This rule would come as a great relief to every individual who earns a few hundred rupees as interest from his/her bank account. Because of this rule tax exemption thing, moving small amounts of money (upto 1 lakh) into a FD actually has very little incentive because, the interest earned from your FD is fully taxable and if you deduct the Tax the actual interest earned will workout approximately to be the same as what you would get from your Savings Account. On top of this, banks will be competing with one another to offer the best interest rates on Savings Accounts for customers.

Thursday, September 5, 2013

Over the past few articles the topic about Mr. Raghuram Rajan the new Governor of the RBI and his impact on the Indian Economy and Rupee has come up. Every time I have been positive of Mr. Rajan's influence and based on his speech yesterday, International Investor confidence has gone up many-fold. The stock market went up significantly yesterday and is continuing the upward momentum today as well. Similarly the Rupee posted impressive gains yesterday and might do the same today as well.

If we go through the key points in his speech yesterday, you will see that he has actually started his tenure as Governor with a knock-out punch and that too within the 1st minute of the 1st round. It was a pleasant surprise to see him come out with such a detailed speech within the 1st week of his tenure as Governor. He must have spent days analyzing the situation and contemplating on the next steps. He finished his speech with the following words:

Finally, a personal note: Any entrant to the central bank governorship probably starts at the height of their popularity. Some of the actions I take will not be popular. The Governorship of the Central Bank is not meant to win one votes or Facebook likes. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism

Without further delays, let me try to give you just the key features and points from his speech yesterday. You can do a simple Google search and read his full speech if you want...

Highlights from Raghuram's Speech - About the Indian Monetary Policy

RBI's Goal: To Sustain confidence in the value of the Rupee, to keep inflation low and stable

RBI's Steps: Deputy Governor Urjit Patel along with a panel of experts will come up suggestions in the next 3 months on what needs to be done to revise and strengthen our monetary policy framework

Highlights from Raghuram's Speech - About the Indian Banking System

RBI's Goals:

1. To accelerate Financial Development.
2. Greater financial access in all parts of the country, rather than meeting bureaucratic norms.
3. To make credit available as required esp. to Sectors of the Economy that need it more
4. To remove the lazy attitude when it comes to recovering loans or cleaning up their books

RBI's Steps:

1. Branch Banking regulations and requirements will be altered to help banks set up new branches quickly and service customers effectively. RBI will require banks to fulfill certain inclusion criteria in underserved areas in proportion to their expansion in urban areas, and we will restrain improperly managed banks from expanding until they convince supervisors of their stability. But branching will be free for all scheduled domestic commercial banks except the ones that are poorly managed.

2. The RBI will encourage qualifying foreign banks to move to a wholly owned subsidiary structure, where they will enjoy near national treatment on a reciprocal basis. We are in the process of sorting out a few remaining issues so this move can be made.

3. RBI will try to ensure that credit is available to the productive sectors of the economy. Banks may require to venture into sectors where they don’t usually enter, but RBI will push them to do so, to ensure that credit is available to everyone who needs it. This might also mean that banks would have to stop investing in Government Securities. The RBI will help banks reduce this in a controlled manner.

4. Banks will be forced to clean up their balance sheets. They can’t sit on bad loans in their books forever. Though the NPA's and Bad Loans situation isn’t alarming yet, it will if left unaddressed. Banks will be forced to raise capital if necessary.

Highlights from Raghuram's Speech - About the Indian Financial Markets

RBI's Goals:

1. To Liberalize the Markets
2. To Make India an Attractive Investment Destination for everyone

RBI's Steps:

1. RBI will work with the Stock Market Regulator (SEBI) to slowly and steadily liberalize the Markets. Restrictions on investments and position taking will be amended to ease the process.

2. Exporters are permitted to re-book cancelled forward exchange contracts to the extent of 25% of the value of cancelled contracts. This facility is not available for importers. To enable exporters/importers greater flexibility in their risk management, RBI will Enhance the limit available to exporters to 50% and Allow a similar facility to importers to the extent of 25%.

3. Cash settled 10 year interest rate future contracts will be introduced to develop the Money Market and the G-Sec Market

Highlights from Raghuram's Speech - About Increasing Capital Inflows

RBI's Goals:

1. To help our banks bring in capital to fund our Current Account Deficit

RBI's Steps:

1. RBI will be opening a special concessional window for swapping FCNR deposits. During this window, banks can swap the fresh FCNR (B) dollar funds, mobilized for a min of 3 year or more Tenors at a fixed rate of 3.5% per annum

2. Current overseas borrowing limit of 50% of the unimpaired Tier 1 capital will be raised to 100%. The borrowings mobilized under this provision can be swapped with the RBI at the discretion of the bank at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market

The above schemes will be open up to November 30, 2013 and RBI reserves the right to close the scheme earlier with due notice.

Trivia:
The RBI's swap window to banks for new foreign currency nonresident (B) dollar funds is expected to lead to an estimated $10 billion of inflows. This is relatively substantial and could help to fund the current account deficit.

Highlights from Raghuram's Speech - About Strengthening the Financial Infrastructure in the Country

RBI's Goals:

1. To improve the efficiency of the Debt Recovery System
2. To improve the payments and Settlements network in the Country
3. To promote information sharing between financial institutions, banks and credit agencies

RBI's Steps:

1. Unique ID's (Aadhar Cards) will be used to uniquely tag individual’s credit histories so that financial institutions can take properly informed decisions
2. Promoters can no longer stay in charge regardless of how badly they mismanage an enterprise. Nor can they use our banking system to recapitalize their failed ventures.
3. RBI proposes to collect credit data and examine large common exposures across banks. This will enable the creation of a central repository on large credits, which we will share with the banks. This will enable banks themselves to be aware of building leverage and common exposures

1. To help individuals save money at a rate that beats inflation
2. To make Bill payments easier for individuals and to make anytime, anywhere bill payments a reality

RBI's Steps:

1. As a joint effort with the Government, RBI will be issuing Inflation Indexed Savings Certificates that will be linked to the CPI New Index which will be made available by end of Nov-2013

2. A GIRO Based National level Bill Payment system will be introduced which individuals can use to link up with their bank accounts and make payments like school fees, medical bills etc.

3. Electronic Funds transfer systems like NEFT and RTGS will be optimized to make person to person funds transfer quicker and more efficient

4. Non-Banking Institutions will be allowed to set up ATM's and Point-Of-Sale Terminals across the country to improve access to financial services in rural and remote areas

My Opinion On These Proposed Changes:

Personally, I am really glad that a person of Mr. Raghuram's knowledge and capabilities is being given control of the RBI. If there is anyone who can bring back investor confidence in our markets, save the rupee and resurrect our economy, it is him.

Let us just hope that our political infrastructure does not interfere with his operations and lets RBI truly be the autonomous body that it is supposed to be. This will greatly help the country, its economy and at the end of the day, the common man.

Tuesday, September 3, 2013

After two weeks of intense pressure and uncontrolled downward movement, I am happy to share with you that the Indian Rupee is indeed recovering. Over the past 72 hours the fall has been arrested and in fact the rupee has posted handsome gains. So, what was it that happened 3 days ago that has stopped this devaluation of the Rupee?

The idea behind this article is to go over the many policy changes that were done by the RBI and our Finance Ministry over the past few days that has played a positive role in this rupee recovery. To top it all off, the new Government of the RBI is taking over as of today and the market sentiment is positive given his impressive resume...

The following are the 10 important measures announced by the Authorities over the past few days that have caused this positive movement for the Rupee:

No. 1: Availability of Dollars for State Owned/Run Oil Refineries

The RBI announced late on Wednesday last week that, a special window to sell dollars through a designated bank to Indian Oil Corp Ltd , Hindustan Petroleum Corp and Bharat Petroleum Corp

Why: Oil is India's largest import item and state refiners are the biggest buyers of dollars in the foreign exchange market. As you may know, our oil refineries Indian Oil Corp Ltd , Hindustan Petroleum Corp and Bharat Petroleum Corp import oil from foreign countries and pay for it in US$. To make this payment these oil co.’s purchase USD from the open market which affects the rupee and its value negatively. The move will remove USD 400 million to 500 million of daily demand from the spot market.

No. 2: Restricting the Import/Purchase of Gold

The government has come up with the following restrictions:

* Import duty on gold has been raised for the third time in eight months to 10% from 8%
* Factory Gate Duty on Gold Bars is hiked to 9% from 7%
* Import of Gold Coins and Medallions is banned
* All imports of gold now need a license from the foreign trade office and would have to be brought into a customs-bonded warehouse.
* Unrefined gold will now be included under an existing rule stipulating that 20 percent of all imports must be used for exports, which is usually in the form of jewelry.

Why: Just like oil, Gold too is one of the biggest contributors for the Governments current account deficit as well as the pressure on the Rupee. The government is looking to contain gold imports at 850 tonnes this fiscal year, compared with 950 tonnes last year. Finance Minister P. Chidambaram said this would lower the import bill by USD 4 billion and help reduce our Current Account Deficit as well as reduce the pressure on the Rupee.

Trivia:
The Government has hiked the Import Tax on Silver too from 6% to 10%. Though this will not has as big an impact on either the Current Account Deficit or the Rupee, it will have a slightly marginal impact on the same lines as what Gold does.

No. 3: Importing Oil from Iran

The Government of India is looking for ways to boost its oil imports from Iran instead of the traditional oil sources in the Gulf.

Why: The price of oil sold by Iran is slightly lower when compared to other gulf countries and by doing so, it may bring down our oil import bill by around 1-1.5 billion USD which will help reduce our current account deficit as well as strengthen the Rupee.

No. 4: Restrictions on Import of Non-Essential Items

Though there have been no official rulings or communication from the Finance Ministry, there are plans to restrict/reduce the import of non-essential commodities like Fridges, TV's etc. The amount of restriction would vary depending on our Trade Agreements with foreign nations.

Why: Any Import into the country has a negative impact on the Rupee as well as on the Current Account Deficit. Restricting Imports will bring marginal savings to both the Rupee and the Current Account Deficit.

No.5: Quasi-Sovereign Bond Issues By State Owned Finance Corporations

The Government has given permission to State Owned Finance Corporations like Indian Railway Finance Corp Ltd (IRFC), Power Finance Corp (PFC) and India Infrastructure Finance Co Ltd (IIFCL) to raise funds from Overseas investors through Quasi-Sovereign Bond Issues. Around 4 billion USD is expected to be raised through this process. RFC will raise USD 1 billion. PFC and IIFCL will raise USD 1.5 billion each.

Why: Influx of US$ funds from foreign investors will boost the supply of US$ and reduce pressure on the Rupee.

The government will allow Sovereign Wealth Funds (from abroad) to invest in Tax Free Bonds floated by State Run Infrastructure Companies. This will be in-synergy with the item no. 5 above and help raise the kind of funds that the government is planning to do so through IRFC, PFC and IIFCL Bond Issues.

Why: Influx of US$ funds from foreign investors will boost the supply of US$ and reduce pressure on the Rupee.

Trivia:
Sovereign Wealth Funds are funds that are owned by the Governments of various countries that invest in financial assets in foreign countries.

No. 7: Relaxing the Overseas Corporate Borrowing Rules

The Finance Ministry has relaxed the guidelines for overseas borrowing by Corporate Co.’s which will help them raise funds from overseas money markets. This is also called "External Commercial Borrowing". Under the new guidelines subsidiaries of MNC's that are operating in India will be allowed to raise money from their parent companies. Even Private co.’s incorporate in India, that are interested in raising money from overseas borrowers are being encouraged to do so. Even the State Run Oil Co.’s will be raising additional funds from offshore money markets and trade financing options.

Without considering Oil Co.’s, this relaxed guideline is expected to bring in around 2 billion US$ funds into our economy. Oil Co.’s for their part will bring in the following funds: Indian Oil - USD 1.7 billion, Bharat Petroleum - USD 1 billion and Hindustan Petroleum - USD 1 billion.

Why: Influx of US$ funds from foreign investors will boost the supply of US$ and reduce pressure on the Rupee.

No. 8: NRI Deposits

With the falling rupee, the amount of money remitted into the country by NRI's has seen a huge spurt in volumes. To tap on this opportunity the Finance Ministry has liberalized the NRI FD schemes which will likely bring in at least USD 1 billion.

The new guidelines are:

1. Incremental flows of deposits into Non-Resident Rupee Account Scheme (NRE)/Foreign Currency Account Scheme (FCNR) will be exempt from cash reserve ratio and statutory liquidity ratio requirements for Banks.
2. For NRE Deposits, the Interest rate will be deregulated for maturity periods of 3 years or more.
3. For FCNR (B) deposits of 3-5 year tenures, the ceiling on interest rates has been related to LIBOR plus 400 bps (From 300 bps)

Why: Influx of funds from NRIs will boost the supply of US$ and reduce pressure on the Rupee.

No. 9: Higher FDI limits

The Cap on Foreign Direct Investment in asset reconstruction companies has been hiked from the current 49% to 74%. This is subject to the condition that no sponsor may hold more than 50% of the shareholding in an ARC either by way of FDI or by routing through an FII. The prohibition on investment by FII in ARCs will be removed through this ruling as well.

Why: Higher capital inflows from Foreign Investors will help support the Rupee

No. 10: Measures to Reduce Forex Outflows

The RBI has announced a few measures to reduce the foreign exchange outflows by resident Indians. They are:

* The RBI has also reduced the limit for remittances made by resident individuals under the liberalized remittance scheme to USD 75,000 from USD 200,000 per financial year
* Remittances cannot be used for purchase of property outside India
* For Companies, the limit for overseas direct investments (ODI) under the automatic route for all new transactions is being reduced to 100% of net worth from 400%
* The reduced limit would also apply to remittances made by Indian companies setting up unincorporated entities outside of the country in the energy and natural resources sectors, but would not apply to ONGC Videsh Ltd, the foreign unit of Oil and Natural Gas Corp or Oil India Ltd .

Why:Lower Forex Outflows means, lower demand for the US$ in the open market and hence reduced pressure on the Rupee

Some final words:

These 10 action items by the Government and RBI seem to have a positive effect on the Rupee and the momentum is expected to be sustained over the next few weeks and bring the Rupee to its intrinsic value against the US$ as well as other foreign countries. It will also make India a favorable investment destination and help boost the Economy. As you can see, the stock market has responded positively over the past 3 days where the market has ended in Green to help Investors recover their losses...

Every Investor is looking for the next hot stock tip. A stock whose price will double or triple in a few months. However, one of the often ...

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